Inference with Difference-in-Differences and Other Panel Data

Stephen Donald and Kevin Lang

The Review of Economics and Statistics, 2007, vol. 89, issue 2, 221-233

Abstract: We examine inference in panel data when the number of groups is small, as is typically the case for difference-in-differences estimation and when some variables are fixed within groups. In this case, standard asymptotics based on the number of groups going to infinity provide a poor approximation to the finite sample distribution. We show that in some cases the t-statistic is distributed as t and propose simple two-step estimators for these cases. We apply our analysis to two well-known papers. We confirm our theoretical analysis with Monte Carlo simulations. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2007
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